Wall of Multifamily Maturities Means Buying Opportunities 

With $1.99 trillion of multifamily mortgage debt outstanding through 2028, a wall of debt maturities is quickly approaching for multifamily borrowers and pockets of the market are already adjusting in advance of greater distress and more widespread price discovery, says Gray Capital. “Select opportunities are emerging as multifamily property owners anticipate broader cap rate expansion and look to get ahead of further pricing declines,” the Indianapolis-based owner/operator and syndicator says in a new report.  

The “strikingly low “sales activity and sizeable bid-ask gap for multifamily investment properties in 2023 has been driven by higher interest rates that have lowered investors’ returns at current prices, the report says. Meanwhile, lower property income growth, higher expenses, and stricter lending terms raise the potential for acute distress and contribute to a more favorable pricing environment for buyers.  

Significantly, longer-term interest rate projections have markedly increased since Gray Capital’s previously issued report on multifamily loan maturities, with the Federal Reserve increasing its 2024 fed funds rate projection from 4.6% to 5.1%. Gray Capital projects further price discovery catalyzed by greater distress due to upcoming loan maturities during the fourth quarter of 2023. 

Following a peak of $115 billion during the fourth quarter of 2021, apartment sales have plummeted to the lowest levels in a decade or more, Gray Capital says. However, that’s due to change—for reasons that favor buyers rather than sellers. 

“Bridge loans issued during the Q4 2021 sales peak are expected to come due in Q4 of this year. A significant amount of multifamily borrowers are facing refinancing and borrowing costs that will encourage sales at prices closer to buyers’ expectations and drive higher sales volume after this period of historically low activity.” 

Although recent reporting from CBRE suggests that ongoing multifamily price declines may soon come to an end, low transaction volumes make it more difficult to use cap rate measurements as an accurate reflection of confidence in the multifamily market, Gray Capital says. Headwinds for apartment performance include higher interest rates, a substantial increase in newly-built properties, resuming student loan payments and a potential economic downturn. 

That being said, the sector’s long-term attractiveness isn’t in doubt. “Long-term prospects for multifamily remain positive, and signs of high housing demand have not abated,” according to Gray Capital. 

Hear from the leaders in loan advisory and special servicing during a panel on distressed assets at Connect Investment & Finance 2023 on Oct. 24 at the Hyatt Regency O’Hare in Rosemont, IL. For up-to-the-minute insights on the state of the market and what’s next in the current cycle, be sure to attend. Click here to register.